A small net percentage of the domestic respondents--about 5 percent--reported
easing standards for commercial and industrial loans to large and middle market
firms and to small businesses over the past three months (chart). About 40
percent, on net, narrowed spreads of C&I loan rates over their bank's cost of
funds on loans to borrowers in both size categories. Smaller percentages eased
other terms, including the costs of credit lines, the maximum size of credit
lines, and loan covenants. Only a couple of banks eased collateralization
requirements. The easing of loan terms was somewhat more widespread in November
than earlier this year, especially for loans to small businesses. As in the
earlier surveys, those banks that eased pointed to increased competition from
other banks and from nonbank lenders as the main reasons for the changes.
In contrast, the branches and agencies of foreign banks reported
a small net
tightening of standards and a tightening of some loan terms for commercial and
industrial loans. Those respondents tightening standards or terms most frequently
indicated that they were doing so because of a reduced tolerance for risk by their
institution. While this reduced tolerance for risk might reflect the recent
turbulence in world financial markets, the less accommodative stance of the
foreign respondents is also consistent with the last two surveys. In August and
May, the foreign respondents were less likely than the domestic respondents to
report easier terms or standards and more likely to report tighter ones. The
November responses are also consistent with the slower growth in business loans at
foreign branches and agencies than at large domestic banks since the second
quarter.
The survey results suggest a broad rise in the demand for
commercial and
industrial loans. Nearly 20 percent of the domestic banks, on net, reported
stronger demand from large and middle-market borrowers, roughly the same as the
fraction reporting a pickup in demand by small businesses (chart). A similar net
percentage of the foreign branches and agencies reported a rise in business loan
demand. Respondents attributed the increased demand to greater customer financing
needs for plant and equipment and also for mergers and acquisitions. In addition,
some of the foreign respondents pointed to a shift in demand from other sources of
finance.
The survey results show mixed changes in commercial real estate
loan standards,
while demand for such loans picked up sharply. Less than 10 percent of the
domestic banks reported easier commercial real estate lending standards, and the
foreign respondents posted a small net tightening. About a third of both the
domestic and foreign respondents indicated that demand for commercial real estate
loans had strengthened.

Lending to Households &nbsp(Table 1, questions 10-17)

The November survey was the eighth in a row to show a net tightening of standards
for consumer loans. However, the net percentage of banks tightening was lower in
the August and November surveys than earlier in the year, suggesting that many
banks have completed adjustments to take account of the deterioration in the
performance of these loans that occurred over the past three years. In the latest
survey, 25 percent of the respondents reported tighter standards for credit card
applications and 10 percent reported tighter standards for other consumer loans.
Both percentages were little changed from the August survey. By contrast, these
percentages peaked at nearly 50 and 25 percent, respectively, late last year.
Changes in consumer loan terms were mixed. Banks tightened
credit limits and
increased spreads on credit card accounts. On other types of consumer loans,
however, some banks increased maximum maturities and cut spreads. Ten percent of
the banks, on net, said that their willingness to make consumer installment loans
had increased over the past three months, about the same as in August (chart).
Consumer loan demand was reportedly a bit weaker on net.
Banks reported a very small net tightening of standards for
approving applications
for mortgage loans to purchase homes. More than a quarter of the respondents
reported increased demand for these loans.

Recently, several large banks have established programs under which they package
and sell securities backed by commercial and industrial loans. These securities
are commonly called "collateralized loan obligations" or CLOs.
² &nbsp The November
survey asked the respondents about such programs. Four of the domestic banks and
six of the foreign branches and agencies reported having programs to sell
collateralized loan obligations, and three domestic respondents and four foreign
respondents indicated that they would have such programs within a year. Thus,
more than a tenth of the domestic respondents and nearly half of the foreign
respondents will likely have issued CLOs by the end of next year. Moreover,
nearly a third of the domestic respondents and a fifth of the foreign respondents
indicated that they were considering establishing a CLO program. The respondents
attributed the recent interest in CLOs to a desire by banks to deploy their
capital efficiently by moving relatively low risk loans off their balance sheets.
They also noted that the continued development of the asset-backed security market
has reduced the cost of such programs, and that, given current market interest
rates, CLOs can reduce funding costs.
The seven domestic respondents that have or plan to have a
program each intend to
securitize an average of about $2.2 billion of commercial and industrial loans
over the coming year, while the ten foreign respondents each intend to securitize
an average of $2.0 billion. Thus, in sum, these respondents plan to securitize
$35 billion of commercial and industrial loans. While this sum is only about 4
percent of the more than $800 billion of bank commercial and industrial loans,
these securitizations could cut the growth rate of business loans on banks' books,
which has run at about an 8 percent annual rate in recent quarters, by about a
half.

Reasons for the Rise in Measured Spreads on Large Business Loans &nbsp(Table 1, questions 21-22; table 2, questions 11-12)

According to the Federal Reserve's quarterly Survey of Terms of Business Lending,
spreads of rates on larger business loans (those of $1 million or more) over
market rates have widened over the past year. This result appears to be at odds
with press reports and the results of past Senior Loan Officer Surveys, which
suggest that spreads have narrowed. The November survey asked the respondents
what factors likely contributed to this divergence. They indicated that the rise
in measured spreads on commercial and industrial loans found by the Survey of
Terms of Business Lending most likely occurred despite a narrowing of spreads on
loans of a given risk, and reflected a more-than-offsetting rise in the average
risk of new loans. They attributed the rise in risk to an increased demand for
riskier credits, especially those for mergers and acquisitions. In addition, some
respondents reported that their bank had decided to accept increased risk in order
to earn higher returns.

In recent years the number of households contacting credit counseling services has
increased substantially, as has the number of households establishing debt
repayment plans with their creditors with the assistance of such services. The
November survey asked banks about their willingness to agree to concessionary
terms on consumer loans as a part of a debt repayment plan. The responses showed
a widespread willingness to provide concessionary terms and an increase in the use
of concessions in recent years. More than two-thirds of the respondents indicated
that they were willing to agree to "some" concessions (perhaps including reduced
late fees, lower interest rates, or longer repayment periods) as a part of a debt
repayment plan, and a couple of banks said they were willing to make "substantial"
concessions. Less than 10 percent of the respondents were completely unwilling to
make concessions. Generally, the respondents indicated that the fraction of their
banks' consumer loan outstandings restructured on concessionary terms as a part of
a debt repayment plan was fairly small: either less than 1 percent or between 1
and 3 percent of outstandings. Half the respondents indicated that this
percentage had increased over the past three years. In part, the rise may reflect
a greater willingness on the part of banks to make concessions. Nearly half of
the banks were more willing to make such concessions today than they were three
years ago.
Somewhat surprisingly, many of the banks apparently restructure
consumer loans on
concessionary terms directly, rather than through a credit counseling service.
Only 20 percent of the respondents indicated that debt repayment plans were
arranged through a service "in most cases," and about 15 percent reported that
counseling services were "rarely or never used." A majority of the respondents
indicated only that arrangements were "sometimes" made through a counseling
service.

1. About 40 percent of the
survey responses were reported to the
Reserve Banks on or before October 27, when the stock market fell
sharply and risk spreads on private securities widened. An even
larger share of the responses likely reflect loan market conditions
before the stock market's decline, however, because some respondents
may have decided on their responses well in advance of the time they
were reported to the Reserve Banks.
2. Banks have issued securities
backed by loans guaranteed by the
Small Business Administration for some time. These securities are
distinct from CLOs.